Another day, another two-and-a-half year high from the Dow Jones FXCM Dollar Index (ticker = USDollar). Yet, ‘new high’ gives a false sense of strength to the lackluster greenback. In reality, the benchmark currency has made little effort to capitalize on its move above March’s swing high and in fact has utterly failed to generate meaningful follow through to convince the market that the bulls are in charge. The issue remains the headwinds seen in risk trends. While the safe haven dollar is climbing, so too is the S&P 500 leading global equities to hearty gains. While the two can move in concert to some degree thanks to the competitive monetary policy programs across the world, a genuine trend requires the support of the more elemental themes. The best way for USDollar to overtake 10,600 is for a maket-wide risk aversion. Otherwise, we could arrive at the same outcome – though likely with limited immediate follow through – with a USDJPY break above 100.

British Pound: GBP/USD Breakout Expected on UK GDP

There is a tangible risk of high volatility for the British pound in the upcoming session. And, for the sterling watcher that pairs the fundamentals and potentially-explosive technical patterns hemming the currency in; that represents serious trade potential. For the upcoming session, the docket is dominated by the United Kingdom’s first read of first quarter GDP. The health of a nation’s economy is important to the value of its currency as capital will flood into a region where expansion promises asset appreciate or yield and flee a hobbled region. The situation, however, is even more complicated for the UK. If there is a negative quarterly print for the period (the consensus is for 0.1 percent growth), it would confirm a technical recession – which is back-to-back negative quarters of GDP.

A negative print for this country specifically would earn the UK the very unflattering label of a ‘triple dip recession’. Not only would investment appeal be crimped from such an assessment, but it would reflect harshly on the government’s persistent drive towards austerity as well as the Bank of England’s (BoE) refusal to follow the Fed and BoJ into larger stimulus programs. It isn’t difficult to imagine speculation of competitive stimulus from the MPC from a poor showing. Regardless, given the tight congestion on pairs like GBPUSD, a breakout is on the agenda.

Japanese Yen in the Bank of Japan Pull

The average daily range from USDJPY over the past three trading days is a meager 84 pips. We haven’t seen a level of inactivity like this since the pair reversed two weeks ago after failing below 100. Before for that, we have only seen activity levels of this scale when the market was chopping higher on pure faith that a massive stimulus program would be introduced by the Bank of Japan (BoJ). The fundamental backdrop is very different today. We have the plan laid out before us. Yet, is it enough? Has the rapid depreciation of the yen to this point represented the speculative build up in the first half of the ‘Buy the Rumor, Sell the News’ adage? Profit taking and risk aversion are tangible themes for traders to watch for; but consistent risk trends, a new stimulus program and presence of entry orders above 100 beckons.

Euro: Building Up Market Speculation Around Rate ExpectationsA once tepid fundamental scenario for the Euro has seen a serious upgrade recently: a burgeoning expectation that the European Central Bank (ECB) will cut rates at next Thursday’s monetary policy meeting. This outlook seems rooted more amongst the economist class rather than speculators however. Looking at the consensus outlook gathered by Bloomberg, there are currently 21 bank economists that expect a 25 bp cut to 0.50 percent versus 15 that expect no change. That is dramatically different than the expectations heading into the last meeting which saw a 2 and 54 split respectively. The dovish view seems to have metastasized quickly following the poor showing in German PMI and business sentiment data. And yet, the market still shows little expectation of the same through swaps. Will the market catch up or ignore this drive?

In the wake of the first quarter Australian CPI (Consumer Price Index) figures, we find the market’s expectations for a dovish bearing for the Reserve Bank of Australia (RBA) have in fact intensified. While the inflation figures missed the market consensus, that still seems remarkable given that the headline, year-over-year figure (which central bank’s use to assess medium-term policy) climbed to 2.5 percent. The core – or ‘Trimmed’ – figure did unexpectedly cool, which may reflect expectations for volatile components to ease soon. Nevertheless, the 12-month rate forecast measured through swaps is at a 3-month low – expectations of 53 bps of easing. Meanwhile, the RBA also announced it would look to diversify five percent of its FX reserves into Chinese assets. This reflects a stronger tie between the nations moving forward.

New Zealand Dollar Manages to Hold Gains after RBNZ Hold

Just yesterday, the Reserve Bank of New Zealand announced that it had held the nation’s benchmark lending rate unchanged at 2.50 percent. That outcome came as little surprise to either the market or economists, but there was nevertheless some early dispute about what and when the central bank’s next move would be. Central bank Governor Wheeler’s comment that growth has improved seems to have garnered far more attention than the remark that rates will be held unchanged through 2013 and that the high currency is a overvalued and a ‘significant headwind’. Ultimately, the market found its expectations met and the rate outlook remains unchanged – a 40 percent chance of a 25bp hike next April – but the kiwi still gained ground and held onto the move. Pair’s like NZDUSD aren’t necessarily overbought, but those like NZDCHF may be.

Gold: Stories of Physical Demand Contrast Sharp Drop in Trading

There have been plenty of stories in the financial headlines related to a surge in demand for physical gold that has sprung out of the metal’s 15 percent tumble below $1,500 (and the 26 percent overall drop since October’s high). In addition to stories of heavy interest in Asia and a recent surge for coins at the UK Royal Mint, we learned from the US Mint that gold coin sales so far this month topped 196,500 ounces – the strongest month since April 2009. That is certainly a strong showing, but we need to put it into perspective. When we look at ETF holdings of the precious metal so far this month, selling equates to 4.85 million ounces or 6.2 percent. Gold is only ‘cheap’ if it is indeed going to climb. Bulls have yet to retake $1,450 – much less the $1,525 break level – and we’ve long ago priced in central bank stimulus from the likes of the Fed and BoJ…

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